Right Thinking from the Left Coast

Banking On AIG

The U.S. Treasury’s sale of its remaining stake in American International Group Inc (AIG.N) will leave taxpayers with a profit of nearly $23 billion – more than the next three most successful bailouts combined.

The government’s profit on the deal is a turnabout from what was one of the most reviled bailouts of the financial crisis.

The 2008 rescue later spurred a senator to suggest top executives at the insurer consider suicide. The Government Accountability Office at one point suggested there was a real chance taxpayers would never be repaid in full.

Yet they were, with $22.7 billion in total returns, including the proceeds of the sale Treasury launched Monday night, AIG said. The government provided AIG with some $182 billion of support.

Before we start dancing in the streets, let’s clarify a few things. We’re still about $38 billion in the hole on TARP, most of the outstanding sums being those lent to the automakers. A lot of the AIG money was actually money paid to European banks that had CDS’s with AIG. Moreover, some losses are not being counted here. How much tax revenue did the government lose because of a stinky economy created by the bailout culture? How much money did we all lose because of that? If the bailouts hurt our economy, on net, to the tune of one tenth of one percent, that would easily wipe out any “profit” from TARP. You might still argue it was necessary as the lesser of two depressions, but let’s not pretend TARP made us all rich.

Most importantly, the money was never the big problem. The big problem was and remains the moral hazard. A big signal has been sent to the big banks that the United State government will bail them out of trouble. Do you think that’s going to cause them to invest more conservatively? And the big banks used that money to consolidate the banking industry, with the Big Five gaining more market share by using the loaned money to buy banks rather than fix the mortgage market. I don’t think it’s all that remarkable that banks managed to turn a profit with monopoly money loaned to them without restriction by the government.

The big risk? This time we are only (so far) out $38 billion. Next time it may be far far worse. And every time someone celebrates TARP “turning a profit”, they should be reminded of the precipice we have put our economy on. If we do end up turning a profit on TARP, it will be because of luck, not because it was good policy.

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The Department of the Treasury said on Tuesday that it planned to sell its remaining 16 percent stake in American International Group for $7.6 billion, which by the department’s count means taxpayers will turn a $22.7 billion profit on the $182 billion bailout.

The Treasury often tries to put the best spin possible on its bailout costs. And as night follows day, bailout watchdogs often disagree with the Treasury. Sure enough, Neil Barofsky, the former special inspector general of the government’s bailout program for AIG, banks and automakers, known as the Troubled Asset Relief Program, warned that the department’s AIG final profit tally relies on fancy accounting.

In an email to The Huffington Post, Barofsky called the government’s profit estimate “misleading” because nearly a third of the AIG stock that the Treasury is selling came from the Federal Reserve, not from the Treasury’s bailout program. What’s more, Barofsky says, the taxpayer stands to lose money from a waiver it gave to AIG on billions in future tax payments.

TARP was a give away. Any attempt to pretend otherwise is stupid and should be called out. We would have been better off letting most, if not all, of these companies/banks implode. Government bailed them out because they had to keep that promise they made when they demanded these companies and banks go along with their social engineering schemes. Had we let the bad players reap the consequences of their actions, there would have been some serious short term pains, but the economy would have recovered long ago from that. Instead we have basically trapped ourselves in a shit economy for a very long time. But then, our social engineering politicians would never again be able to get anyone to go along with their scams.